Q:  What is your investment philosophy?

A: Market or company-based announcements sometimes offer investors an opportunity to profit from stock price movements. Stocks can sell-off dramatically when the market receives negative news and they can fail to fully reflect good news.

When either corporate information or a significant stock price change indicates a company has the potential to be an attractive investment, an analysis of the earnings capability of its assets is undertaken.

We do not believe in screening stocks on financial criteria to identify potentially attractive investments because these parameters are generally not forward looking.

Q:  What kind of earnings do you consider? Are you looking to buy companies trading at a discount to intrinsic value?

A: From our perspective the key to valuation is forward earnings. Estimating forward earnings based on historical earnings is not advisable unless the company’s industry is stable. We try to identify events or catalysts that could affect the company’s profitability and estimate the impact on the company’s value in the short and long term. If the company’s stock trades at a discount to this estimate of intrinsic value based on future earnings, we consider the company statistically acceptable. If the catalysts needed for closure of the discount are visible, the company shares are viewed as an investment. Furthermore, a discount to the intrinsic value provides a margin of safety for the investment.

Q:  How do you identify and evaluate events for your investment process?

A: Our main sources are market, economic and company specific news that we classify broadly into negative and positive events.

The occurrence of a negative event generally results in a significant price decline in the marketplace. However, a price decline, even a large one, may not signal a real opportunity but it should cause us to investigate. Industry or companyspecific knowledge is an advantage in an analysis. An earnings miss is an important example of a negative event. If in our perception, the underlying causes of a company’s earnings miss were not long term or fundamental to its operations, we would be interested in the stock. If we believe the stock has significant upside, then we complete the analysis.

Positive events that trigger our interest include expansion of a company’s current product line, a new management, or a business acquisition. A management change often improves company focus.

An acquisition will also attract us especially where it suggests that a company has improved its competitive position. In these cases, there is an opportunity for higher returns that may not be reflected in the company’s stock price.

Q:  Can you give an example of a stock pick where you have benefited from a negative event?

A: Federal Express or FedEx Corp. In 2005, this leader in express delivery service missed quarterly earnings with a higher fuel price an important contributing factor. Along with this negative, there were two positive long-term factors affecting the company. One, FedEx was revamping its business to carry more heavyweight freight and second, it was building out its international network. Our analysis suggested a company in transition to a higher level of profitability (in a stable economic environment) and an attractive investment.

Q:  Can you give an example of stock pick based on acquisition or on positive event?

A: One unique example is a holding we acquired five years ago. There were actually three phases in the evolution of this portfolio holding, a small company - in pharmacy services – AdvancePCS.

At the start of this decade, we became interested in changes underway at drug distribution companies like McKesson Corp. and realized there was opportunity to profit as pharmacy benefit management services were granted to more corporate and government employees and retirees.

We noted with interest the sale by McKesson of its retail pharmacy benefit manager, PCS, to Rite Aid Corp., a drugstore chain. Next, PCS, the erstwhile McKesson subsidiary was sold to Advance Paradigm to form AdvancePCS which afforded the new company the advantage of PCS’s network and technology, including software for administering retail pharmacy benefits. We liked the opportunity and established a position in AdvancePCS after the merger. The new company provided a better offering of healthcare services including a dramatic improvement in retailpharmacy benefit management.

The next important event took place in 2004 when pharmacy services provider Caremark Rx, Inc., purchased AdvancePCS. Again, we felt there were significant benefits from the merger of these two companies including strengthened retail and mail and integrated retail and mail pharmacy services allowing the combined company to compete effectively against Medco Health Services, heretofore the dominant mail pharmacy provider.

The third event was in May 2007, when Caremark merged with giant drug store chain CVS, promising profitability gains from economies of scale. Today that holding remains a significant position in the Fund. At each step in this chain of acquisitions, the outlook was reevaluated. Our analysis at each stage indicated that the acquisition would drive earnings and that there were substantial added gains possible for shareholders.